In re Miller, Bankruptcy No. 1-86-01972.
| Decision Date | 01 September 1988 |
| Docket Number | Bankruptcy No. 1-86-01972. |
| Parties | In re Herbert Andy MILLER, Jr. & Quindal Sue Miller, Debtors. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Eastern District of Tennessee |
Thomas E. Ray, Ray & North, Chattanooga, Tenn., for debtors.
Paul M. Predmore, U.S. Dept. of Justice, Tax Div., for I.R.S.
Before the bar date for filing proofs of claims, the Internal Revenue Service filed a proof of claim against the chapter 13 debtors for personal income tax. After the bar date, the IRS amended the claim twice.
The first amendment added more personal income tax for another year.
The second amendment added a claim against one of the debtors, Mr. Miller, for a 100% penalty. The 100% penalty allows the IRS to collect from an officer of a corporation the unpaid employment taxes on the earnings of the corporation's employees. The IRS can collect the taxes, in the form of the 100% penalty, from any officer of the corporation who was responsible for withholding or paying the taxes and willfully failed to do so.
The chapter 13 debtors have objected to the second late amendment, the one that seeks to add the 100% penalty claim against Mr. Miller.
The debtors argue that the 100% penalty claim should be disallowed because the proof of claim was filed after the bar date and it does not relate back to the original proof of claim filed before the bar date. The debtors contend that the 100% penalty claim does not relate back because it is a completely different claim for a different kind of tax.
The amount of the 100% penalty claim is over $40,000. Though Mr. Miller has not admitted liability, the court assumes for the purpose of ruling on the objection that Mr. Miller is liable for the penalty.
The parties have stipulated most of the facts. The facts recited below also include the IRS's version of the dealings between its revenue officer and Mr. Miller during the audit that led to the 100% penalty; the IRS wants to make the point that Mr. Miller talked to the revenue officer several times during the audit but never mentioned the chapter 13 case, and this caused the IRS's failure to file a proof of claim for the penalty before the bar date or to ask for an extension. The facts are as follows.
One of the debtors, Mr. Miller, was an officer of a corporation known as Dorothy W., Inc. Dorothy W., Inc., filed a chapter 11 bankruptcy case on August 8, 1986.
Notice of Dorothy W.'s chapter 11 case was sent to the IRS's Special Procedures Section in Nashville, Tennessee. Since Dorothy W. owed employment taxes, the notice of the chapter 11 case provoked the IRS to begin an investigation to determine whether the 100% penalty should be assessed against any officer of the corporation.
The investigation was assigned to a local revenue officer, Mr. Zorn. The revenue officer first talked to Mr. Miller in early September, 1986, about a month after Dorothy W. filed its chapter 11 case. They agreed to meet later to discuss the 100% penalty.
The revenue officer first met with Mr. Miller on September 12, 1986. Mr. Miller's chapter 13 case was filed the same day. He did not tell the revenue officer that he was filing or had filed a chapter 13 case.
In the schedules filed with their chapter 13 petition, the debtors listed debts to the IRS for 1984, 1985, and 1986 income tax and a contingent debt for the 100% penalty arising from Mr. Miller's involvement with Dorothy W., Inc. The debts were scheduled as follows:
Creditor Amount When Incurred
IRS $2,895.00 1984
IRS 9,500.00 1985
IRS 9,000.00 1986
IRS 1.00 Contingent claim
on Dorothy W., Inc
withholding
Notice of the debtors' chapter 13 case was also sent to the IRS Special Procedures Section in Nashville, Tennessee. The IRS admits receiving notice of the chapter 13 case.
The notice says, "The debtor is employed by Dorothy W. Company."
The notice set January 14, 1987, as the last day for filing proofs of claims.
Shortly after this notice was mailed, the debtor amended the schedule of debts as follows Internal Revenue Service Special Procedures Section P.O. Box 1107, Stop 31 Nashville, Tennessee 37202 $1.00 (Contingent liability for withholding of SVW, Inc.)
The debtor's attorney certified service of the amendment on the IRS on the same day that it was filed, September 30, 1986.
On October 3, 1986, the IRS filed a proof of claim for personal income tax owed by the debtor for the year 1984. The amount of the claim is $2,900.
The meeting of creditors was held as scheduled on October 16, 1986, and the court confirmed the plan on the same day. There were no objections by creditors or the chapter 13 trustee.
The plan provides for payment of priority claims in full in deferred cash payments. As to non-priority unsecured claims, the plan is a "remainder" plan, which means they will be paid the money left over after paying secured and priority claims.
During this period of time, the local revenue officer was continuing the 100% penalty investigation. He met with Mr. Miller again in November, 1986. Mr. Miller didn't tell the revenue officer that he had already filed a chapter 13 case.
The revenue officer completed his investigation in early December. He recommended that the 100% penalty be assessed against Mr. Miller.
In mid-December, 1986, the revenue officer telephoned Mr. Miller and told him that he had proposed assessment of the 100% penalty. Mr. Miller still didn't mention his chapter 13 case.
The revenue officer's group manager approved assessment of the penalty about the same time, mid-December, 1986. The recommendation was sent to a clerk to prepare a formal notice of assessment of the 100% penalty.
On December 22, 1986, the IRS amended its proof of claim to add personal income tax for the year 1985.
On December 29, 1986, the chapter 11 case of Dorothy W., Inc., was converted to a liquidation case under chapter 7.
The time for filing proofs of claims in the debtors' chapter 13 case ended on January 14, 1987. The IRS had not filed a proof of claim for the 100% penalty and had not asked for an extension of the time to file a proof of claim.
The proposed assessment was mailed to the debtor on February 23, 1987, about two months after the IRS had approved the proposal. The IRS says that the delay was due to the normal backlog of cases and the holiday season that intervened after approval of the proposed assessment.
The proposed assessment is as follows:
Tax Period Date Return Filed 100% Penalty
1/86—3/86 4-30-86 $ 5,244.21
4/86—6/86 7-31-86 24,637.73
7/86—9/86 10-31-86 10,660.33
__________
$40,542.27
Dorothy W.'s employment tax returns were timely filed. The third quarter didn't end and the return was not filed until after both Dorothy W. and the debtors had filed their bankruptcy cases.
After Mr. Miller received the proposed assessment in late February, 1987, the debtors' attorney wrote a letter to the local revenue officer who did the penalty investigation. The letter is dated March 10, 1987. It notified the revenue officer that the debtors were in a chapter 13 case.
The revenue officer responded to the letter by calling the debtors' attorney and telling him that the penalty case had been turned over to the special procedures section in Nashville.
In May, 1987, the court entered a routine order allowing claims. It included the IRS's claim against the debtors for 1984 and 1985 personal income tax.
On June 24, 1987, the IRS amended the claim again to include 1986 personal income tax. This was the first amendment after the bar date. The debtors have not objected to it.
In July, 1987, Mr. Miller received a letter from the IRS service center in Memphis stating that the 100% penalty was being assessed. On July 15, 1987, the debtors' attorney responded with a letter informing the IRS that the debtors had filed a chapter 13 case in September, 1986. The Memphis IRS office forwarded the letter to the special procedures section in Nashville. On August 20, 1987, the IRS filed the amendment to its claim to add the 100% penalty.
The debtors filed their objection shortly thereafter.
Both the debtors and the IRS rely on the district court's decision in In re Miss Glamour Coat Co., Inc., 80-2 U.S. Tax Cas. (CCH) ¶ 9737, 46 A.F.T.R. 2d (P-H) ¶ 6083 (S.D.N.Y.1980).
In that case the IRS filed a timely proof of claim for about $1,100 in employment taxes. The IRS filed a series of amendments after the bar date; the amendments added more than $100,000 in corporate income tax to the claim. The bankruptcy court did not allow the late amendments to relate back. It relied partly on the fact that the amendments sought to add a different kind of tax from the tax included in the timely proof of claim.
The district court remanded on the ground that the bankruptcy court had applied the wrong standard for determining whether the amendments should relate back. The district court held that the standard for determining whether an amendment to a proof of claim relates back should be the same as the standard for determining whether an amendment to a complaint relates back. That standard is set out in Rule 15(c) of the Federal Rules of Civil Procedure.
Under Rule 15(c), the question of whether an amendment relates back usually arises when the sequence of events is (1) complaint filed, (2) statute of limitations runs, (3) amendment filed. The defendant in that situation argues that the amendment must be dismissed because recovery is barred by the statute of limitations. The plaintiff argues that the statute of limitations is not a defense because the amendment relates back to when the complaint was filed before the limitation arose.
Rule 15(c) provides...
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